Parental loans and gifts on the rise

Many parents offer financial support when their children buy or renovate a home, says Nibud, the Dutch National Institute for Family Finance Information. Nibud bases this conclusion on its recent survey on financial relationships between parents and their adult children, commissioned by ABN AMRO. Most parents help their children out when they need some extra cash. Amounts are usually given not on a regular basis, but whenever needed. Still, there are some pros and cons to keep in mind.

Of all parents, 51 per cent indicate that they help their children out financially. That is a significant increase compared to 2010, when 41% came to their children’s aid. Over three quarters of parents state that the economic crisis has not influenced the financial relationship with their children. In by far the most families, parents help out on an irregular basis, by giving or lending money when the child needs it or asks for it.

Pros of gifting

The child is able to buy a more expensive house or has lower mortgage costs.

A deed of gift can be drawn up to ensure that the gift does not go towards short-term consumer expenditure.

A gift at this stage may mean the child pays less or no inheritance tax later.

Cons of gifting

A gift used to pay down part of the mortgage could lead to positive equity, which means the house is worth more than the mortgage. If the child later sells this house and buys another house, the part of the new mortgage corresponding to the positive equity on the old house will in principle not qualify for mortgage interest tax relief (Bijleenregeling).

Pros of lending

A parental loan often involves less costs and paperwork than a loan from a bank.

For the parents, the loan qualifies for tax purposes as an asset in box 3. For the child, the interest can in principle be deducted in box 1. That could be financially advantageous on a family level.

Cons of lending

Part of the parents’ assets are tied up in the child’s home, and are thus unavailable for short-term spending.

Parents and child enter into a long-term financial relationship with each other. This could cause issues if the personal relationship changes for any reason.

A loan will negatively impact the child’s borrowing capacity, making it harder for the child to obtain any additional loans. Banks and other credit suppliers may not be willing to lend as much if parents are lending as well.